Johnny Lyu co-founded KuCoin in 2017 and has since steered the company as Chief Executive Officer to become one of the top five largest crypto exchanges globally. With a record 30 million users, KuCoin sees over $420 million in daily trading volume and $2 billion in total assets.
In an exclusive interview with Cryptopolitan, Johnny shared an insight into KuCoin’s operational procedures and systems with regard to security, compliance, and criteria for token listings on the exchange. The interview was conducted by Yaroslav Belkin, Founder of Belkin Marketing and Karnika E. Yashwant (Mr. KEY), Founder of KEY Difference (Accelerator & VC) and Co-Founder of Forward Protocol.
Belkin and Yashwant also got Johnny to share his personal view on relevant industry trends, including CBDCs and stablecoins, which he believes are needed in the sector.
Stablecoin Will Continue to Exist
Stablecoins, basically digital currencies pegged to fiat currencies and other assets, are one of the most significant innovations in crypto. The current market capitalisation of dollar-backed stablecoins stands at $123 billion, representing more than 11% of the total crypto market cap.
Due to their stable value, these coins have helped to make cryptocurrency usable for everyday transactions and, most importantly, enabled a robust monetary system for decentralised protocols and ecosystems – more like a gateway between crypto and the real-world financial system, as many would say. And for this reason, Johnny believes that stablecoins are needed and will continue to exist.
Stablecoins are “definitely needed by the industry as long as there is an interaction between crypto and reality,” Johnny said. “If there is no interaction between our life, work, and the actual reality, then there is no need for stablecoin at all. Then, in that case, all we need is virtual currency, for example, Bitcoin.”
In recent years, however, stablecoins have also come under intense regulatory scrutiny due to the lack of transparency by the issuers. To that effect, Johnny said he personally has an open attitude towards stablecoin, and with due diligence, KuCoin will continue to support stablecoins for as long as they are needed by the market and the users.
“We are still an exchange. So, we will make our judgement based on technologies and applications. And when there is a tendency involving centralization, we will also make our analysis and decision considering the projects’ compliance and regulation,” Johnny answered when Mr. KEY asked about KuCoin’s stance on listing stablecoins.
CBDCs: A Threat or Opportunity?
The concept of central bank digital currency (CBDC) is one that has been discussed and trialled by several countries of the world, with the lead of China, followed by Australia, India, the United States and Canada, which are all considering exploring CBDCs.
While there are critical views about CBDC, especially from the crypto community, Johnny believes it is not a relationship between “opportunities and threats” rather, it’s a product that is inevitable.
From the blockchain perspective, CBDCs seem to be misaligned with the original utopian that people had about it. However, the positive side remains that it has allowed more governments to get involved in digital currency. “By essence, that is good,” Johnny said.
“So, I don’t think it’s a clear-cut between opportunity and threat. […] The reason that CBDCs exist in the first place is that there are institutions that want to get involved. And so, I think we should first encourage their involvement and participation and welcome them so that everyone will be part of it, and then we will gradually filter and understand what is better versus those that are less good or ideal in a way.”
AML and KYC Measures at KuCoin
One drawback of cryptocurrencies has been the illicit usage by bad actors, which can be pinned to the inherent privacy feature of blockchain technology. Although illicit crypto transactions, predominantly associated with money laundering purposes, make up a tiny percent of all crypto payments, it’s still a serious concern for regulators and affects the public appeal of the crypto sector.
Speaking on this, Johnny said the value of blockchain technology should not be denied because of the drawbacks it inevitably has. “What we need to do is to maximize its value so that it can create sustainable value and make logical contributions to the welfare of the whole generation and society,” he added.
Crypto exchanges have a major role to play in minimizing illicit transactions with crypto, especially since the funds usually make their way back to these exchanges for laundering. Earlier this year, Chainalysis reported that over $23.8 billion worth of crypto was transacted by illicit addresses last year, and centralized exchanges were the biggest recipients of illicit cryptocurrency.
On that front, Johnny said KuCoin has employed analytical tools and tracking systems for anti-money laundering and theft. In July, the exchange also introduced mandatory know-your-customer (KYC) checks for new and existing customers, all in an effort to mitigate activities such as fraud, money laundering, scams, and prevent dirty money from coming to the exchange.
KuCoin’s Risk Control Measure Against Market Manipulation
When it comes to preventing pump-and-dump and market manipulations, KuCoin follows a code of conduct built around the activities of normal users and market makers or project founders, according to Johnny.
“If it’s just transactions done by individual users and traders, then there would not be so-called pump and dumps because everything is based on the rationale and organic behaviour of these users. They review the market and make decisions accordingly,” Johnny said. “But once there is involvement of market markers or project owners, it could be very different.”
When the activities of project owners align with the fundamentals or information disclosed about the token, like the amount of token issued and total supply, then it would not be considered manipulation. But in the case where it doesn’t, due to over-issuance or suspicious activity, “then we will definitely capture that with our risk control system,” said Johnny.
In another scenario involving individual users with sizable positions, KuCoin has to analyse the users’ historical behaviour to know what their past behaviour and patterns have been to make a judgement call. These sets of people are classified into different levels, which have a determined threshold of transactions each.
“As a neutral platform, we are providing a trading platform for users. We won’t place restrictions on them because they just simply want to hold large assets or they don’t like an asset anymore and want to sell them in bulk. We can’t just stop them from doing so,” said Johnny. However, in the case where there is a “large transaction associated to user level that is not compatible with the past historical behaviour, then we will definitely see that as a red flag.”
User Asset Security at KuCoin
Regarding the incessant reports of protocol hacks and exploits in the crypto sector, Johnny said that KuCoin has implemented several industry-standard security measures and encryption algorithms, including multi-factor authentication, to protect sensitive data and assets of customers against unauthorised access.
In addition to user security education, KuCoin has also enhanced its internal debugging efforts and public bug bounty program (up to $1 million in rewards) to improve its product and security.
“We invite our employees and our partner to perform attack and defence drills and exercises to identify potential vulnerability. This is a simulated environment that we have with the aim to find vulnerability,” Johnny said. “We do whatever that we can to offer the maximum guarantee on that aspect.”
Criteria for Token Listing on KuCoin
Among other things, Johnny noted that KuCoin prioritizes the hardcore technologies that can actually solve problems when it comes to the exchange’s token listing criteria. He explained that the crypto industry is still in the early development stage, and so a large amount of infrastructure is needed to support the sustainable development of the industry and to improve the whole ecosystem of the virtual world.
“We will look at these potential applications to see whether they can solve the problems that are considered challenging and […] actually whether they can help in serving the public with real needs” in the blockchain space.
As dubbed the “People’s Exchange,” KuCoin also considers tokens for listing based on the popular demand of the users. Johnny said the founders or team behind the project also matter, and they encourage projects and their owners to keep their dreamer DNA regardless of the listing situation.
Johnny said institutional investors can also recommend tokens for listing on KuCoin, with all due diligence observed. “We believe good projects often attract other good projects. […] To that, it will definitely be a plus when they apply for their listing if they are endorsed by other successful projects on KuCoin already.”
The quotations are as interpreted by Cathy – ‘translator.’